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Merchants continued their assault on a class-action settlement with Visa and MasterCard over interchange fees yesterday, making their case before the judge that will ultimately determine the agreement's fate.

In an all-day hearing in U.S. District Court in Brooklyn, presiding Judge John Gleeson, who granted the settlement preliminary approval last November, heard arguments for and against the agreement that will eventually form the basis of his final ruling that will determine the settlement's future. If approved, the agreement would provide $6.05 billion in direct payments and $1.2 billion in temporary interchange rate reductions to merchants, but it would also prevent businesses from filing similar antitrust suits in the future.

The curiously structured settlement would allow merchants to opt out of the lump payment and rate reduction portions of the agreement, which nearly 8,000 merchants representing more than 25% of Visa and MasterCard's card volume have already done. It would not, however, allow them to opt out of the parts of the settlement that preclude future suits against Visa and MasterCard over how they set their interchange fees, which most opponents to the settlement consider a fatal flaw.

"The proposed settlement is next to worthless," said National Retail Federation (NRF) Senior Vice President and General Counsel Mallory Duncan. "It does nothing to reduce swipe fees or keep them from rising in the future, it offers retailers pennies on the dollar for the damage that has already been done and it tries to tie merchants' hands from ever suing again. This is actually worse than no settlement at all because it further entrenches the monopoly held by the card companies."

NRF urged Judge Gleeson to "right or reject" the proposed settlement, by either allowing merchants to opt out of the entire agreement, not just monetary provisions, or reject the settlement. "As it stands, the settlement rewards the perpetrators and traps the victims," said National Retail Federation (NRF) Attorney Andrew Celli. "But it is not hopeless. It can be made fair. You have the power to make it so."

For their part, Visa and MasterCard argued that the legal release from future litigation included in the proposal is narrow in scope, covering only existing rules or similar rules the companies might propose in the future, but this has done little to assuage opponents' concerns.

Merchant groups like the National Association of Convenience Stores (NACS) have also called into question the size of the proposed settlement's payout provisions, considering the estimated $30 billion that Visa and MasterCard have earned from interchange fees every year since the lawsuit was filed in 2005, and the still exorbitant costs that merchants pay to accept credit cards even today. "Anti-competitive practices have resulted in our industry paying more in card fees than it makes in pre-tax profits every year since 2006," said NACS President and CEO Henry Armour. "The vast majority of our industry is made up of small businesses. In fact, 60% are single store operators. Because our industry pays such huge fees, $11.2 billion in 2012, NACS has had thousands of conversations with our members about interchange fees and discussed the problems and potential solutions in depth."

The proposed settlement, as a means to alleviate this burden, allows merchants to pass on their processing costs to their customers via surcharge, a provision that became effective in late January. But many have argued that this is an unworkable solution, both from a marketing perspective and because a growing number of states are considering surcharging bans that would make the provision useless. "The primary rules relief in the settlement, surcharging, is completely unworkable because of negative consumer reactions to surcharging, state laws that prohibit it and the level-the-playing field provisions," said Armour. "Most telling is the fact that since February when retailers have had the ability to surcharge under the settlement there has been virtually no movement in that direction. That is compelling evidence that the ability to surcharge has no value to the class."

Judge Glesson offered no hints as to when he might make his final ruling, but noted that regardless of whether the settlement is fully approved, the fight over interchange fees may not be solvable without comprehensive federal legislation.

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